Aqua Buddha and the Number 21

At this point most of the country has heard the story of “Aqua Buddha.” According to an anonymous account, during his college days, Kentucky Senator-elect Rand Paul dragged a woman down to a river and told her to bow down to the river, which he referred to as “Aqua Buddha.” His opponent in the campaign tried to make an issue out of this incident by implying that Mr. Paul worshipped the river as a god.

Whatever the truth of this incident, it doesn’t come close to the silliness exhibited by Alan Simpson and Erskine Bowles, the co-chairs of President Obama’s deficit commission. Among the items on the to-do list of the chairs was a cap of government spending at 21 percent of GDP. One can only assume that the number 21 bears some sort of religious significance for Simpson and Bowles because it certainly makes no sense to have this sort of rule on policy grounds.

The standard way to determine the size of government is to have the government perform the services that are more efficiently and effectively done by the government than the private sector. If the total value of these services is less than 21 percent of the economy, that would be fine. On the other hand, there is no obvious problem created if it is more than 21 percent, except for those with religious beliefs about the number 21.

The point is fairly straightforward. There are a number of services that are obviously performed better by the government than the private sector. Almost everyone’s list would include the military, police and fire departments. Most people also think that the government has a responsibility to ensure that children get an education and ideally a good one. Some of these services can even be contracted out, but the money still must be raised through tax revenue and pass through the government.

It turns out that public retirement plans like the U.S. Social Security system are far more efficient than their private sector counterparts. The administrative costs of Social Security are less than 1/20th the cost of maintaining 401(k)s on average. This makes a strong argument for a public social security system.

Any individual program must be assessed on its merits, but suppose a careful examination of these programs gives a total government share of the economy in excess of 21 percent. In this case, the Simpson-Bowles 21 Percent Rule would dictate that we shift some services that are more efficiently provided by the government to the private sector. This implies wasting resources, thereby slowing growth and costing jobs. In other words, because of Mr. Simpson and Mr. Bowles’ reverence for the number 21, we will have to throw people out of work.

It is possible that Simpson and Bowles are basing their 21 Percent Rule on political economy grounds. The story would be that out of control politicians just can’t keep themselves from continually increasing the extent of government interference in the economy. There are two problems with this picture.

The first problem is that insofar as this is true, the Simpson-Bowles 21 Percent Rule won’t help. If politicians are determined to interfere in the economy, it is easy to find ways to do so that do not involve direct spending by the federal government.

For example, the federal government can pressure state and local governments to spend through either mandates or matching funds. It can also use tax expenditures to replace spending. For example, the tax deductions for housing and employer provided health care are mechanisms through which the government subsidizes housing and employer provided health care. However, these subsidies don’t count as part of the Simpson-Bowles 21 percent.

The government can also redistribute income by shaping markets, for example by providing or extending patent and copyright monopolies. It can also erect or eliminate trade barriers in various markets to steer income in specific directions.

In short, out of control politicians will not be prevented from interfering in the economy by the 21 Percent Rule, they will just have to take a different course. And, in most cases the different courses pursued are likely to involve less transparency and more inefficiency than direct government spending.

The other flaw with the political economy argument is that it is fighting a problem that does not exist. According to the projections from the Congressional Budget Office, non-interest spending is projected to be 18.6 percent of GDP in 2020 (total spending is projected at 22.7 percent). In 1980, non-interest spending was 18.8 percent of GDP. This means that over this 40-year period the share of federal spending on programs will have actually fallen by a small amount. Federal spending has not been out of control, as Simpson and Bowles seem to believe.

In other words, the 21 Percent Rule is bad solution for a problem that does not exist. We should pray to Aqua Buddha that Congress doesn’t take it seriously.